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For years, government-issued currencies have reigned supreme as the go-to means of buying and selling goods and services. And investors and consumers of all breeds have long relied on the traditional financial sector to mediate their everyday transactions.

Then, in the last months of 2017, something happened—

People around the world purchased new, complex financial products that promised to upend this system—products that many of them didn’t understand. Media headlines touted “Bitcoin billionaires” and multi-thousand per cent returns. An alphabet soup of terms and acronyms—from “ICO,” “blockchain,” “distributed ledger,” and “miners,” to the more obscure “hash,” “nodes,” “fork,” and “HODL”—joined the common lexicon. Traditional financial sector players entered the arena, creating products and services catering to the sector, signaling that these new products were coming of age as a legitimate financial asset class.

We’re talking, of course, about “cryptocurrencies”

—more
accurately called “cryptoassets”, as
many of
these assets aren’t meant
to be used in the way traditional currencies are used.

Skyrocketing returns never last forever, though, and cryptoassets were no exception. Cryptoasset prices went down significantly in late 2017 and early 2018.

But nonetheless, cryptoassets haven’t gone away. The technology that powers cryptoassets can foster innovative ways to raise capital and increase transparencies and efficiencies in the capital markets.

We at the Ontario Securities Commission (OSC) recognize this. We’re committed to fostering innovation in the financial sector, while at the same time working to protect investors and ensure they pay attention to risks as well as opportunities before buying a cryptoasset.

THE CRYPTOGiST

An estimated five per cent of Ontario adults—translating to over 500,000 Ontarians—owned cryptoassets as of March 2018. Half of this group spent under $1,000 on the cryptoassets they own.

Recent OSC research (see box above) indicates that, while many financial consumers are interested in the cryptoasset sector and its innovative potential, most of these consumers are also approaching this emerging sector with caution.

Our research also found, however, that some cryptoasset owners in Ontario—estimated to number in the tens of thousands—may be placing highly risky bets on cryptoassets, and that many cryptoasset owners are confused about how cryptoassets work and how they are regulated. Consumer complaints received by the OSC’s Inquiries and Contact Centre indicate that low knowledge about cryptoassets and how they work led many to take significant risks and incur significant losses, including as a result of falling for scams advertising fake cryptoasset products and services.

The point of this article isn’t to tell you whether or not to buy cryptoassets. Rather, it’s meant as a reality check—to make clear that headlines about outsized returns aren’t the full story. Opportunity and risk go hand-in-hand, and having a sense of potential red flags will help you to take advantage of new products and services while keeping in mind the risks that come with them.

This article provides a basic overview of:

what cryptoassets are and how they work,

the different ways of acquiring cryptoassets, and

the different financial products that have values
tied to
cryptoassets or the blockchain technology they're based on.

It also draws from real consumer complaints submitted to the OSC’s Inquiries and Contact Centre to show the ways in which Ontarians lost money or were exposed to potential fraudsters trying to take advantage of consumer interest in the sector by offering fake cryptoasset products. The descriptions of these complaints have been modified to protect the identities of those who contacted us.

You should note that this article is provided for informational purposes only and is not a source of official OSC policy or a substitute for legal or financial advice. The information in this article is current as of November 1, 2018. We recommend that you consult with a qualified professional advisor before acting on any information appearing in this article.

WHAT ARE CRYPTOASSETS, AND HOW DO THEY WORK?

Cryptoassets are intended to serve a variety of purposes. For example, they may be designed to be used as a medium of exchange or to access a product or service. You can also buy traditional investment products (stocks, mutual funds, and exchange-traded funds (“ETFs”)) that are linked to cryptoassets or blockchain technology. As with any major purchase or investment, it’s crucial that you understand how these assets work and the risks involved.

Cryptoassets typically share a unique feature: they use a new way to record transactions called a “distributed
ledger.” Instead of maintaining a single set of records on a single system (like your bank or investment account), duplicate electronic records are kept and maintained by volunteers on a (potentially worldwide) network. Before a transaction can “settle” or be permanently recorded, a critical mass of systems on the network must agree that it is valid.

The distributed ledger keeps track of the entire chain of custody of the cryptoasset, and the records are secured using cryptography. Blockchain is a distributed ledger with this added security feature. Newly validated transactions are added to the blockchain by “miners”, a subset of the computer systems on the cryptoasset’s network. These miners use their own computers to add transactions to the blockchain, and typically receive fees or rewards for this service.

Distributed Ledger

Getting agreement among a network’s systems on whether to add a transaction to a blockchain takes time. This means cryptoasset transactions may be subject to delays. Users can pay miners to skip the line and get their transactions processed more quickly, but fees can be steep and difficult to predict. Fees vary depending on the cryptoasset used and the number of other transactions competing for a place on the blockchain.

Digital coins

The first types of cryptoassets to emerge were “digital
coins”, such as Bitcoin and Litecoin. They were originally intended to act as new mediums of exchange.

While they are often associated with anonymous payments on the “dark web” and ransomware, the number of legitimate payment uses for digital coins is growing. Canadians can now use them on some websites to pay for things like flights and hotels, furniture, movies, music, games, and apps. A small but growing number of retail stores (mainly in urban areas) also accept digital coins, along with some charities.

Digital coins are not issued or backed by a Canadian bank or a Canadian monetary authority. Businesses that accept digital coins for goods and services can change their practices at any time. For example, some vendors stopped accepting digital coins in 2017 and 2018 due to their price volatility. Businesses may also charge you additional fees when you pay with digital coins.

Recent research found cryptoasset owners in Ontario were most likely to report owning digital coins, with Bitcoin (at 63 per cent) being the most popular.
Nearly one in four past and present cryptoasset owners reported paying for specific goods or services using cryptoassets in the past 12 months. They used digital coins to buy consumer products, collectables, consumption goods, digital and online services, and computer equipment and software.

Digital tokens

Many startups and other businesses create new cryptoassets—“digital
tokens”—and offer them to
investors as a way of raising capital. These offerings are variously
referred
to as
“initial
coin offerings,” “initial token offerings,” or “token generation
events” (this
article
refers
to them as “ICOs”).

Digital tokens typically are designed to provide access to a service that a business plans to offer in the future, but they can be used for other purposes as well. For example, a digital token may track ownership of “real-world” physical assets or provide for voting rights in a business.

The functions of a digital token are programmed into that token—that programming is called a “smart contract,” because it says what rights, if any, the token holder has. The supply of a digital token is set by the business that creates the token—for example, a business may create new tokens to raise more capital or to grow the community of users of its tokens.

Businesses raised an estimated US$5.6 billion in 2017 (including over US$200 million reportedly raised by Canadian businesses) selling digital tokens. Total token sales for 2018 are even higher, with businesses selling over US$20 billion in digital tokens between January and September 2018.

Digital Token Sales

Outcomes for digital token purchasers, however, have been mixed at best.

One study found that nearly half (46 per cent) of the 902 digital tokens
launched in
2017 had
already failed by February 2018.

This includes 276 tokens that failed post-ICO. The study also found that an additional 113 tokens (12 per cent) were showing signs of failure by this time. Overall, investor returns from digital tokens have been trending downward since early 2017.

DiGiTAL WALLETS

Digital coins and tokens are intended to be held in digital “wallets."

Holding cryptoassets in a digital wallet is a bit like holding an email account. You are assigned a “public key,” similar to an email address, which you can share with other people and lets you receive cryptoassets from others. You are also assigned a “private key,” similar to an email password, which lets you access your account and send cryptoassets to other people, and which you do not share with others.

Of course, digital wallets don’t function exactly like email. Unlike with email, where you get to pick your address and password, the public and private keys are assigned to you. Each key contains a string of letters and numbers. Your keys are linked together by an algorithm, which allows computer systems to confirm that your public and private keys correspond to the same account.

Another difference is that, in many cases, you do not provide any personal information to set up your digital wallet. This makes your transactions difficult (but not impossible) to trace back to you. It also means that, if your private key is lost or stolen, you can’t regain access to your cryptoassets by validating your identity.

Digital coins and tokens may be held in your own digital wallet, or, if you have an account with a cryptoasset service provider (such as a cryptoasset trading platform), you can keep your digital coins and tokens in the service provider’s digital wallet.

Digital Wallet

Cryptoasset Trading Platform

When you hold cryptoassets in your own digital wallet, the security of your cryptoassets depends on your ability to prevent your private key from being lost or stolen.

When you hold cryptoassets in your service provider’s digital wallet, that service provider holds the private keys to your cryptoassets, and you have to rely on that service provider to protect your assets from loss or theft, and to maintain accurate records of the amount of cryptoassets you own. You must also rely on the service provider to keep enough cryptoassets on hand to meet its clients’ withdrawal requests—if it doesn’t, any request you make to withdraw your cryptoassets from the platform may be delayed or not met at all. If your service provider goes bankrupt—as discussed later in this article, this is not uncommon—this may also result in your losing your cryptoassets.

BASED
ON A TRUE
STORY:

Buyer be (very) aware

One caller learned about a new digital token from a friend. Excited about the chance to get on the ground floor of a new business, he sent his friend $4,000 to invest. The “friend” subsequently vanished.

Always do your own research before thinking about participating in an ICO.

If you have questions about a particular ICO, or cryptoassets generally, the OSC is here to help. We can be reached at

1-877-785-1555

inquiries@osc.gov.on.ca

You can also get more information at GetSmarterAboutMoney.ca the OSC's investor education website, which provides unbiased information about investing and tools to help you make informed investment decisions.

WHERE DO I GET CRYPTOASSETS?

There are all kinds of ways to acquire cryptoassets, including through a cryptoasset trading platform, a physical kiosk, an ICO, or by mining cryptoassets.

Cryptoasset trading platforms

Cryptoasset trading platforms facilitate speculation in cryptoasset prices by allowing for their purchase and sale. They’re the most common means of acquiring cryptoassets among Ontarians.

These platforms are not the same as regulated stock exchanges

While these trading platforms often refer to themselves as “exchanges,” you shouldn’t confuse them with regulated stock exchanges like the TSX. Currently, no cryptoasset trading platform is recognized as an exchange or otherwise exempted from Ontario’s securities laws to operate as a marketplace or dealer in Canada.

There may also be no monitoring of trading on a platform for manipulative activity or other market integrity issues. Cryptoasset prices also often vary from platform to platform—in other words, the same cryptoasset may cost more on one platform than another. What’s more, trading and other fees vary from platform to platform and may not always be clear.

In 2017, trading platforms struggled to deal with a massive influx of customers hoping to make money by trading cryptoassets, with many reporting significant delays setting up accounts and withdrawing cash. Withdrawal delays can occur when a trading platform fails to keep enough cash and cryptoassets on hand to meet withdrawal requests.

Cyberattacks are a big risk

When you hold cryptoassets through a trading platform, you rely on that trading platform to protect your cryptoassets from loss or theft by keeping its digital wallets secure. But the volume of cryptoassets held through these platforms makes them an attractive target for hackers. Cyberattacks by hackers can create substantial shortages of funds, potentially resulting in a platform’s bankruptcy.

For example, the Japan-based Mt. Gox was the world’s leading Bitcoin trading platform until it filed for bankruptcy in 2014, reporting that it had lost almost 750,000 of its customers’ bitcoins due to hacking. Over 2017 and 2018, several other trading platforms based around the world reported thefts or losses of cryptoassets, sometimes numbering in the hundreds of millions of dollars and in some cases resulting in the platform’s filing for bankruptcy.

In a trading platform bankruptcy, you could lose some or all of the cryptoassets you held with that platform.

ICOs

Over the past year, hundreds of businesses have raised capital by selling digital tokens in an ICO. Over one in ten Ontario adults have been approached or sought information about an ICO, though only 1.5 per cent have actually participated in an ICO.

Typically, a business launching an ICO will publish a “white paper” that says how much money they want to raise, how the money will be used, and how long the ICO will go on for. Typically, the management team will make themselves available to answer your questions via social media.

While ICOs may at first glance seem similar to an initial public offering (IPO) launched by a company on a stock exchange, ICOs and IPOs are very different. Unlike shares sold in an IPO, digital tokens typically do not represent an equity interest in the business. This means token purchasers typically do not get a right to own part of the business, the right to vote for the business’s board of directors, or the right to receive dividend payments from the business.

A recent study found signs of widespread fraud in this sector: of 1,450 ICOs reviewed for the study, 271 were found to display red flags of fraud, including plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams. And as experience has shown, even legitimate ICOs have a high risk of failure.

Most ICOs are subject to securities regulation.

Many businesses offering digital tokens may not be complying with applicable requirements that exist to protect investors. For example, the white paper published by a business may not include the level or quality of information required to be provided to prospective investors. Securities laws generally prescribe that a business provide prospective investors with a prospectus or an offering memorandum. These documents include key information about the business, its management, operations, and business risks, as well as the rights investors will have if they invest in the business. This information helps prospective purchasers make an informed investment decision. Those trying to sell digital tokens to the public may also be required to register as investment dealers. These requirements apply regardless of where a business is located—if the business is selling digital tokens to Ontario investors, it must comply with Ontario securities law.

Checklist: Do your research

Finding a legitimate company with a smart business idea that understands and complies with the regulations that protect you as an investor means doing your research. Before buying a digital token:

Make sure you understand what the token does, what it gets you, and whether the business model makes sense.

Run a web search to see if you can find the location of the business and the people on the business’s team—fraudsters may use stock photos to construct fake management teams. Think about whether the management team has relevant experience, and check to see if there’s a way you can contact them directly. If you can’t contact the team or they can’t answer your questions, beware. Remember that it may be more difficult to enforce your rights against a business located outside Canada.

Use the OSC’s Check Before You Invest site to find out whether they’re authorized to sell investments in Ontario or have previously been flagged as posing a risk to investors.

In short, be skeptical. If something looks too good to be true, it probably is. Beware of companies promising guaranteed increases in value or warning that you should buy now to avoid “missing out”—these are both red flags of fraud.

Message boards, social media, and blogs may help you learn more about a particular digital token, but there’s no guarantee that posts on these channels are impartial. People linked to a business offering digital tokens may post positive information on these forums to try and generate interest in their tokens. Many businesses create “bounty programs” that reward people for posting positive information to increase hype. Keep in mind that posts may also be outdated or inaccurate by the time you come upon them.

To show investors what a fraudulent ICO might look like, the OSC launched TBAcoin.ca, a mock ICO that displays many of the red flags associated with fraud.

Cryptoasset kiosks

Some companies offer digital coins for sale at a physical kiosk, often branded as an “ATM,” which lets you insert cash in exchange for digital coins. If you already have a digital wallet, the kiosk can send your digital coins to that wallet. If you don’t have a wallet, the kiosk often can assign you new public and private keys and print them off for you on a slip of paper (so that you can add them to a digital wallet later).

These kiosks are not the same as ATMs used to deposit and withdraw money. Kiosks may be unreliable, may not have enough cash to meet withdrawal requests, or may not be able to complete deposits and withdrawals in a timely way. Before purchasing digital coins at a kiosk, make sure you understand the fees you are being charged, as these fees can be substantial. Keep any private keys you receive secure, and don’t share them with anyone.

Mining

It’s possible to earn cryptoassets by participating in cryptoasset mining—operating computer systems that validate cryptoasset transactions and help add them to a blockchain. Currently, most cryptoasset transactions are added to a blockchain through “proof of work” mining, which means that different miners race to solve complex math problems that need to be completed before a set of transactions can be added to a blockchain.

Proof of work mining is expensive

—you need sophisticated computer hardware to stand a chance at being the first to add transactions to a blockchain, and operating that hardware consumes a lot of electricity.

Some cryptoassets' networks add transactions to a blockchain through a “proof of stake” system, in which a user is chosen to process a particular set of cryptoasset transactions based on the amount of cryptoassets that user holds.

For example, a user who holds 30 per cent of the total supply of a given cryptoasset will have a 30 per cent chance of being allocated the next set of transactions, while a user who holds only 10 per cent of that supply will have a 10 per cent chance of being selected.

Because mining in a proof of stake system tends to cost less than mining in a proof of work system, the transaction fees and other rewards paid to these miners tend to be lower.

BASED
ON A TRUE
STORY:

Smoke and Mirrors and Public Parks, Oh my.

The OSC’s Inquiries and Contact Centre received a call about a business trying to raise several million dollars in an ICO. The caller said he looked into the company and found that its listed address seemed to be a public park and its listed phone number didn’t seem to work. The caller also told us the promoters of the ICO seemed to be made up. The company’s website was no longer accessible as of the date of this article.

Always do your own research before participating in an ICO.

If you have questions about a particular ICO, or cryptoassets generally, the OSC is here to help. We can be reached at

1-877-785-1555

inquiries@osc.gov.on.ca

You can also get more information at GetSmarterAboutMoney.ca the OSC’s investor education website, which provides unbiased information about investing and tools to help you make informed investment decisions.

ARE CRYPTOASSETS THE ONLY WAY TO BREAK iNTO BLOCKCHAiN?

There are ways of gaining exposure to cryptoasset markets and blockchain technology that don’t involve directly buying cryptoassets. For example, you can buy shares of companies and funds that are engaged in the cryptoasset sector, or in the development of blockchain technology more generally. You may also get exposure to cryptoassets using “derivatives”, such as futures contracts or contracts for difference where the cryptoasset is the underlying asset referenced in the contract.

Each of these types of investments is subject to regulation. For example, securities laws generally require that a prospectus be filed with the OSC before investments in a company or fund can be sold in Ontario. A prospectus provides you with important information about the company or fund you are investing in. Some investments may be exempt from this requirement if they meet other requirements set by the OSC to protect investors.

Here, we focus on three products that are currently available in the public capital markets: investments in cryptoasset service providers, other blockchain companies, and blockchain funds.

CRYPTOASSET SERViCE PROViDERS

Miners, cryptoasset trading platforms, and other businesses involved in the cryptoasset sector may sell digital tokens or raise capital through traditional means, such as by selling stocks or bonds, to finance their activities. The value of an investment in a cryptoasset service provider is likely to depend on the business’s ability to generate income over time, which in turn may depend to a large extent on the overall growth of cryptoasset markets.

Investments in cryptoasset service providers raise many of the same questions as investments in any other business. Be sure to research the business, its management team, and its plan for growth before investing. Also, be sure to review the disclosure documents prepared by the service provider, including disclosures on the risks involved in investing in them.

These risks will likely include the risk that a cyberattack will result in loss or theft of that business’s assets or user base, the risk that cryptoasset volatility will affect the business’s operations or profitability, and the risk that low or declining adoption and use of cryptoassets will affect the business’s profitability.

OTHER BLOCKCHAiN COMPANiES

Blockchain technology is a means of keeping records—not just records of cryptoasset transactions. As a result, blockchain has potential applications in a range of industries that have little to do with cryptoassets, and many companies are developing these potential applications.

Don’t buy into a company just because it brands itself as a “blockchain” company. Make sure you understand the business and how it uses (or plans to use) blockchain first. The quality of the company’s management and its business plan will have a substantial influence on that company’s ability to generate long-term returns and capitalize on any long-term growth in the blockchain sector.

The relationship between a company’s returns and growth in the blockchain sector will also depend on the extent to which that company engages in blockchain-related activities as part of its business. For example, a company whose entire business is based on developing different uses for blockchain may experience significant gains in value based on the overall growth of the blockchain sector, but significant losses if the sector shrinks. A company that devotes only some of its business to the blockchain sector may be less affected by these shifts.

BLOCKCHAiN FUNDS

Investment funds, including mutual funds and ETFs, may invest in a range of blockchain companies to offer investors diversified exposure to the blockchain sector. Blockchain funds offer diversification—because a fund invests in a range of businesses, your returns are less likely to depend on the success of any single business.

Blockchain funds are not all the same—their investment managers may pursue different strategies carrying different levels of risk to expose investors to the blockchain sector. Before investing in a blockchain fund, make sure you understand what the fund is investing in. For example, a fund may focus on emerging companies that operate primarily in the blockchain space, or established companies that are introducing blockchain into their operations. A fund may also focus on blockchain companies that are operating in a particular sector or developing a particular use of blockchain technology. Different funds may also have different strategies for adapting to changes in the blockchain sector as it develops.

Different funds may charge different levels of fees depending on whether they are “actively-managed” (i.e., managers choose individual assets based on analysis or other criteria) or “passively-managed” (i.e., managers buy and hold assets that track an index or benchmark, such as the S&P/TSX 60). Make sure you understand how these fees add up before you invest.

In the case of blockchain mutual funds, your investment value may go down and redeem at a loss. While ETFs are listed on exchanges, there is no guarantee that investors will be able to sell their units or shares for the price they purchased them at.

BASED
ON A TRUE
STORY:

When it sounds too good to be true…

If you are promised high returns with little or no risk, be very careful and do your research. No individual or firm can guarantee returns for an investment.

The OSC Inquiries and Contact Centre received a call from someone who found a website claiming to operate a cryptoasset trading platform and that promised 100% returns in just 100 days, but that seemed more like an old-fashioned pyramid scheme. She said a friend of hers had even signed up a family member to the scheme.

Another caller reported receiving the same pitch from an acquaintance by email—the email claimed everything was in compliance with securities laws but didn’t explain how.

The promise of high returns is always a red flag. That’s not how real investments work. Vague promises that a product complies with applicable laws shouldn’t give you any comfort.

Always do your own research before participating in an ICO.

If you have questions about a particular ICO, or cryptoassets generally, the OSC is here to help. We can be reached at

1-877-785-1555

inquiries@osc.gov.on.ca

You can also get more information at GetSmarterAboutMoney.ca the OSC’s investor education website, which provides unbiased information about investing and tools to help you make informed investment decisions.

WRAPPiNG UP

Cryptoassets and blockchain technology have the potential to make markets more transparent and efficient. At the OSC, we’re working to encourage innovation through OSC LaunchPad, which engages with financial technology companies to help them navigate legal requirements and strives to keep regulation in step with digital innovation—including by organizing the OSC’s first regulatory “Hackathon” in 2016.

But as an investor, it’s important to remember that potential and certainty are not the same thing. There’s no guarantee that cryptoassets or blockchain will grow over the long-term, and the odds of any particular cryptoasset or application of blockchain succeeding are even less certain.

The data show that any prospective purchaser in this sector faces long odds. Many cryptoassets have failed, and many schemes purporting to offer cryptoassets have turned out to be frauds.

This makes consumer protection important, and it’s why the OSC wants to make clear that the cryptoasset sector is not an unregulated space. Most ICOs are subject to securities regulation. Certain cryptoasset products may be derivatives and subject to the derivatives-related regulations adopted by securities regulators. If a cryptoasset trading platform facilitates the trading of cryptoassets (or interests in cryptoassets) that are securities or derivatives, that platform is required to comply with securities law. When someone selling a cryptoasset or a product related to cryptoassets suggests that they don’t need to comply with regulation, be skeptical.

As is the case with any major purchase, it’s important to exercise caution before buying:

Make sure you understand what the relevant cryptoasset or blockchain product is meant to do and what needs to happen for it to gain in value.

If the product is a digital token or other investment product marketed by a business, make sure you understand the business model and have researched the management team to make sure they’re real people who seem likely to make the business succeed.

If the product is a cryptoasset fund or blockchain fund, make sure you understand what’s in the fund and how the fund managers are compensated.

Always look for independent, unbiased information and advice.

Beware anyone promising guaranteed returns and resist the urge to buy now out of fear of missing out—this is how fraudsters convince you to give them your money.

Remember that the OSC is here to help. GetSmarterAboutMoney.ca the OSC’s investor education website, provides unbiased and independent tools to help you make informed investment decisions. You can also use the OSC’s Check Before You Invest site to check whether someone offering cryptoassets is authorized to sell investments in Ontario or has previously been flagged as posing a risk to investors. And the OSC’s Inquiries and Contact Centre is available to answer your questions about cryptoassets. You can also contact them to report suspected frauds. You can reach them at 1-877-785-1555 or inquiries@osc.gov.on.ca.

A type of distributed ledger that keeps track of a cryptoasset’s history of validated
transactions. The ledger is maintained on a decentralized network of computers and
uses cryptography for security. Newly validated transactions are added to a blockchain
by a subset of the computer systems on the network through a process called “mining”.
Data added to the blockchain is extremely difficult to alter.

A digital representation of an asset, including digital coins and digital tokens (sometimes called “cryptocurrencies”). They may be designed to be used as, among other things, a medium of exchange or a right that lets you access a product or service. Transactions involving cryptoassets are recorded on a type of distributed ledger called a blockchain.

Cryptoasset trading platforms facilitate trading in cryptoassets by allowing for their purchase and sale. While these trading platforms often refer to themselves as “exchanges,” these platforms are not equivalent to regulated stock exchanges such as the TSX. Currently, no cryptoasset trading platform is recognized as an exchange or otherwise authorized to operate as a marketplace or dealer in Canada.

Includes investments with a value that is based on (i.e., derived from) an underlying asset or group of assets (such as digital coins or digital tokens). Examples of derivatives include futures, options and swaps.

A type of cryptoasset commonly designed to provide access to a service
that a business plans to offer in the future. A digital token may also
track ownership of “real-world” physical assets or provide for voting
rights in a business. The functions of a digital token are programmed
into that token by way of a smart contract.

An abbreviation of “Initial coin offerings” (also known as “initial
token offerings” and “token generation events”). ICOs are a means of
raising capital by which firms will distribute a digital token, most
commonly in exchange for money or other cryptoassets. Most ICOs are
subject to securities regulation.

Often branded as an “ATM,” a physical kiosk that lets you insert cash in
exchange for digital coins. These kiosks are not the same as ATMs used
to deposit and withdraw money. Kiosks may be unreliable, may not have
sufficient cash on hand to meet withdrawal requests, or may not be able
to complete deposits and withdrawals in a timely way (for example, as a
result of the time it takes to confirm a transaction on a cryptoasset’s
blockchain).

People operating computer systems that validate cryptoasset transactions
and seek to add them to a blockchain. Miners that successfully add
transactions to a blockchain typically receive newly-issued
cryptoassets as a reward, and may also receive transaction fees from
users.

A string of letters and numbers assigned to a cryptoasset holder’s
account, which lets them access the account and send cryptoassets to
other people. It is analogous to an email password. It is associated
with the public key by use of an algorithm.

A system for adding validated transactions to a blockchain, in which a
miner is chosen to process a particular set of cryptoasset transactions
(and receive rewards for processing these transactions) based on the
amount of cryptoassets that miner holds.

Currently, most cryptoasset transactions are added to a blockchain
through a “proof of work” system, which means that different miners
race to solve complex math problems that need to be completed before a set
of transactions can be added to a blockchain.

A string of letters and numbers which cryptoasset-holders can share with
other people to receive cryptoassets. It is analogous to an email
address. It is associated with the private key by use of an algorithm.